NCPA - National Center for Policy Analysis


August 3, 2010

Due to a legal quirk, the death tax is scheduled to come back to life in 2011.  The renewed death tax would once again inflict serious harm on family businesses, workers and the economy.  Congress should act before the end of the year to repeal this economically harmful tax permanently, says Curtis S. Dubay, a senior analyst in tax policy at the Heritage Foundation. 

Estates that consist largely of family-owned businesses are the most vulnerable to the death tax.  Family-owned businesses and the families that own and operate them are synonymous for purposes of the death tax.  The value of the portion of a business owned by a deceased person, including the business's assets, such as equipment and property, is included in their estate.  The high value of these assets is the cause of the problem for family-owned businesses, says Dubay. 

For example: 

  • The business's assets make the estate appear valuable on paper and can raise the value of the estate above the threshold over which the estate is subject to the death tax.
  • Just because the business's assets are worth enough to push the value of the estate above the threshold does not mean the family has enough cash available to pay the death tax.
  • Family-owned businesses often reinvest all available resources back into the business to keep its operations running consistently or purchase new equipment and property to grow the business.
  • These family businesses cannot easily sell their assets to raise cash when the death tax hits because those assets are necessary to generate income and employ workers.
  • Nevertheless, if a family member passes away, the death tax liability of the estate would apply to the full value of those assets. 

If a business's available cash does not cover the full estate tax bill, the family must sell some of its assets -- despite their necessity for the operation of the business.  The forgone assets the business sells to pay the death tax lowers its income-generating capability, forcing it to reduce wages or let go of some existing workers because of reduced capacity, says Dubay. 

Source: Curtis Dubay, "The Economic Case Against the Death Tax: Family-Owned Businesses Hit Hardest," Heritage Foundation, July 20, 2010.  

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